Regulators OK BlackRock’s Copper ETF

By Brendan Conway

The Securities & Exchange Commission has given the go-ahead for another exchange-traded fund that would store copper in a vault, moving ahead over the objections of industrial users of the metal.

BlackRock’s (BLK) iShares exchange-traded fund unit was given the greenlight to launch iShares Copper Trust in a regulatory filing dated Friday. The plan and a similar one by J.P. Morgan Chase (JPM) have together stoked opposition among end users of the metal, some of whom predict a supply crunch. Regulators have argued that the funds’ copper stockpiles wouldn’t disrupt the supply of copper available for immediate delivery.

Here’s how the SEC handles this issue in last week’s filing, which is a worthwhile read if you’ve ever wondered about the cause-and-effect of building exchange-traded funds. The SEC isn’t convinced that this one will harm prices.

The Commission does not believe that the listing and trading of the Shares is likely to increase the likelihood of manipulation of the copper market and, correspondingly, of the price of the Shares. Generally, the Commission believes that increased transparency helps mitigate risks of manipulation. For example, in approving the listing and trading of shares of the iShares Silver Trust, the Commission stated that the dissemination of information about the silver shares would “facilitate transparency with respect to the Silver Shares and diminish the risk ofmanipulation or unfair informational advantage.” In this case, the Commission believes the transparency that the Trust will provide with respect to its holdings, as well as the dissemination of quotations for and last-sale prices of transactions in the Shares and the IIV and NAV of the Trust, all are expected to help reduce the ability of market participants to manipulate the physical copper market or the price of Shares.

Also, the Commission believes that the listing and trading of the Shares on the Exchange (and any other national securities exchange that trades the Shares pursuant to unlisted trading privileges) may serve to make the overall copper market more transparent if OTC trading of unreported warehouse receipts shifts to trading Shares on exchanges….

The commenter asserts that serious disruptions in the supply of copper would make corners and squeezes more likely. As discussed above, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery.

Depending on the size of the Trust though, it is possible that copper holdings may be dispersed across an additional market – i.e., less copper may be held under LME and/or COMEX warrant and more copper may be held by the Trust. However, the availability of inter-market arbitrage is expected to help mitigate any potential increase in the ability of market participants to engage in corners or squeezes as a result of any dispersion of copper holdings across markets (as distinguished from a reduction in the copper supply).

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.